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In an interview with ET Now, Raamdeo Agrawal, Director & Co Founder, Motilal Oswal Financial Services, talks about HUL after the parent company Unilever announced an open offer. Excerpts:

ET Now: Surprised and happy by the Unilever move?

Raamdeo Agrawal: Yes, it is a real good move. This speaks for the consumer boom which is going on now. This is a very good stamping on the rich valuations which we have today for all the franchises.

ET Now: I know you do not own a lot of HUL, but if you did, would you be tempted to tender your shares at Rs 600?

Raamdeo Agrawal: Definitely. Already at Rs 500, after yesterday's result, it was fairly rich and with this 20% premium it clearly becomes a good sell.

But if you are a long-term investor, who has gone through the pain of holding throughout 2001-2010, it clearly could be a hold because the company is doing very well and they have found their growth track in businesses. So I do not think one will be very well off, you will get about 10%-15% higher price, but post offer the prices might correct back to may be Rs 525.

However, if you want to make one time profit of Rs 70-80, then of course you should offer, but most people must be in the taxation brackets of 15%-20%. So post tax I do not think they will be very well off. So it is better to hold on if your post tax return from the sell off is not significantly better.

ET Now: What does this mean for the long-term price range for the stock from here?

Raamdeo Agrawal: This company is a dividend machine, they pay out almost 80-90%, at times even 100%. This year because of special dividend they have paid almost 100% of the profits. If you look at last 10-15 years as an average, they have paid out anywhere between 70 and 100% of the profit, making the average pay out for 15 years to be around 80%.

With a payout of 80% and an average yield of 2.8% for the last 15 years, you get a fair PE multiple of about 30-32. This PE multiple is sustainable for this company and I am sure that they will continue with their dividend payout.

ET Now: At a time when global MNC parents are looking at increasing their stake in Indian subsidiary, what are your thoughts on the FMCG sector per se?

Raamdeo Agrawal: There are two aspects. One is that the cost of money for the parent companies is significantly lower. So they are investing from a 1% or 2% opportunity cost. For us, it is around, I would say, 15%. So value for the same franchise is different for a person sitting in London and the one sitting in Mumbai. So they will be pretty happy getting 10%-12% return, but since inflation itself is 10% here, I would not be very happy getting 12% return.

Second, on the ground, because of this buyback the franchise does not change, their growth, their profitability, the competent structure do not change. In fact, nothing changes on the ground.

One positive thing I see is that exponential consumerism, that we think is going to happen in the next 10-15 years, is somewhere being validated by these purchases. But clearly their cost of money is very low and hence they are able to make these purchases at 30-32 PE multiple.

ET Now: For all the viewers watching and perhaps being puzzled about whether they should tender in the open offer or not, what would be your quick answer to that?

Raamdeo Agrawal: Clearly they have to look at their tax structure. If I am holding the stocks in company structure, in that case I will have PAT of about 18-19%. So clearly if I tender at Rs 600, I will get only about Rs 500 net to myself. That does not make a difference whether I tender it or not. Bulk of this premium goes to the government.

Just because this particular event has happened, it does not change my purchases. Today, I make this decision just because this offer has come. Otherwise I was pretty well-off not doing anything. One has to look at the taxation structure and clearly post-offer, the stock will open maybe Rs 70-75 lower.

ET Now: Do you think now Unilever has a big game plan for the Indian FMCG sector and now we could be staring at more competition in the sector?

Raamdeo Agrawal: I think they must be already doing whatever they can do. Even if you launch something brand new today, it does not guarantee you success in this competitive marketplace. I do not think as far as business prospect is concerned, they have got their growth back. If you look at the last 15-year trajectory, they are in the 9-10% top line and bottom line situation despite taking the fact that they had a slowdown for 5-6 years in between, even in the last five years, they are about 12-13%.

Growth has picked up somewhat. It is not that they are in a hyper mode. Most of their segments are highly competitive. All the global majors, local majors have very high levels of penetration. So to find a new category which can just explode on our face, I do not think there is anything like that there. They will keep growing at maybe 12-13% at steady pace.

ET Now: Let us talk about your new fund offering, the new NFO from your house, at a time when no one wants to buy and touch equities as an asset class?

Raamdeo Agrawal: That is the most opportune time to buy into equities because whenever you hate to buy equities, you must buy them. Of course I cannot force anybody to do that, but one of the things we have seen is that as far as the equity behaviour is concerned, whenever there is a massive demand for equities and markets are overvalued, you see a lot of IPOs, today you see buybacks. It is kind of a bottom of the market.

At the top of the market, you see a plethora of IPOs at exorbitant prices. At the bottom of the market, the same corporates come in, buy their stocks at whatever price they are quoted. It tells me that this is an opportune time, the environment is right for investing.

In the last 34 years, there have been only three declines. One was in 1993, second was in 2008-2009 and third was I think in 1987. They always were followed by or preceded by a massive rise in the markets. I do not think there is any fear at this level since the markets have not risen in the last two-three years to crazy levels that they can fall from. Mybe if at all, then by not more than 10-12%. If you are scared of even 10-12% fall at the given point of time, I do not think you should come into the stock market.

ET Now: What is your big prediction for FY14?

Raamdeo Agrawal: You do not change investing style every year. You get some investing style after 15-20 years of practicing the market with hard work and that style must continue. Otherwise it is not a style. If it has to change everyday or every year, it is not a style. So you get some recipe and you have to continue with that.

We will keep buying consumer companies, consumer-focussed companies, high quality financials, economic moated companies, companies with huge economic moats like Hindustan Lever, Nestle or whole lot of other businesses. In every business, you find companies with economic moat. So if you like a business, find the company which has a highest economic moat and go about buying some portion of it.